BKUNA Matata: Not Such A Wonderful Thing
BankUnited's quarter brings to banking a toxic mix of Bubble-Era "vendor financing" and home-brewed accounting assumptions.
Here are the lowlights from BankUnited's (BKUNA) quarter and conference call:
Regarding the TransEastern loan for which last quarter it had reserved nothing on its $14M secured tranche, $7.0 mln was sold at a $1.3 mln loss in the Dec. quarter, and another $7.3 mln was sold for an additional $1.3 mln discount in the current quarter. When management suggested that BKUNA has no other commercial loans in trouble, it also explained why the secured tranche was sold (you can't make this stuff up Minyans): "The only [bad loan] we had [was] related to the TransEastern situation, and frankly, I doubt we would have sold it. It would have been a close question because we felt that [we would] recover our entire proceeds, but because someone had a special agenda for some reason to put our name on the whole $670 million of the loan, we felt that we needed to get that behind us and so we did and we went ahead and sold it. It's not my normal thing. I usually like 100% plus recoveries. So we proceeded to do that and that essentially leaves us at this time with no commercial loans that we are aware of presently."
For those who are not up to speed on the story, management was likely referring to a sell-side research note which basically broke the news that BKUNA was on the hook to TransEastern for $17 mln. In short, had the analyst not uncovered the bad loan, the bad loan would have never existed. Evil analyst-with-an-agenda!
Residential Non Performing Assets (without including the $1.3 mln related to TransEastern) jumped from $21.4 mln last quarter to $43.8 mln this quarter. Management suggested that in the current quarter NPA's may go as high as 0.60-0.80% of Total Assets compared to the current 0.33%, i.e. roughly double again. To most people that would suggest things are getting worse and some prudence might be appropriate. No so for BKUNA's management, who decided to reserve $2.7 mln, or 12% of the new NPA's. The total loan loss reserve is now 87.6% of Non Performing Loans, or less than one half what a typical bank usually reserves. This compares to last quarter 37% reserve for new NPA's, and a total loan loss reserve of 87.6% of NPL's (down from 307% five quarters ago, 243% two quarters ago, and 175% last quarter). One can only assume that if bad loans continue to rise, BKUNA will soon be in a position to actually reflect a gain on its income statement (tic).
If this is all confusing to readers, understand just one thing: every dollar that gets reserved in a given quarter for new NPL's comes straight out of the pre-tax earnings of the company. Therefore if BKUNA had merely reserved 50% of the new NPL's for this quarter, its pre-tax income per share would have been some $0.50 cents below what was reported.
If the quality of the earnings reported were not bad enough, about $0.04 of EPS came from loan sales at an unusually high margin (1.4% vs. typical 1.0%). Non-cash interest income was 164% of total net interest income. Since such a number brings us into the realm of the absurd, consider that non-cash interest income was 55% of all interest income before any interest costs; i.e. 55% of what we generally would define as a company's revenues did not come in as cash but rather was tagged onto the outstanding balances of the existing loans. This may be the closest a banking outfit will ever get to implementing "vendor financing Y2K style"...at least until BKUNA reports its next quarter.
At risk of beginning to sound like a Ginzu Knives infomercial...wait, there's more: management could not sugarcoat the fact that its residential loan growth has all but disappeared and management is actually concerned about that. Some of course might view the inability of lending money that does not seem to generate any cash as a blessing, but I digress.
Bottom line, despite the above House of Horror, management suggests that there is nothing to worry about because, and I paraphrase, BKUNA's underwriting standards are so stellar, and its team so experienced, that all loans will be recouped in full with interest, even if it takes a foreclosure. Hence there is no meaningful risk of losses and certainly no reason to reserve for such losses.
Beam'em up Scotty!
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter